Supreme Court: FCA’s Knowledge Prong is Subjective, not Objective

The U.S. Supreme Court has unanimously held that the False Claims Act’s (FCA) scienter element refers to a party’s actual knowledge or subjective beliefs.  In doing so, it overturned the Seventh Circuit’s application of the Safeco test to the FCA, which the court of appeals had interpreted as requiring courts to first consider whether a challenged act was objectively reasonable before considering a party’s actual subjective thoughts.

Petitioners brought separate qui tam actions against two retail pharmacies, alleging that they had overcharged Medicare and Medicaid programs when seeking reimbursements for prescription drugs covered by those programs.  Specifically, petitioners alleged that the pharmacies had sought reimbursements based on prices that were higher than their “usual and customary” prices.  However, the phrase “usual and customary” was ambiguous.  In one of the qui tam actions, the district court granted summary judgment on the issue of scienter in favor of the pharmacy, holding that it could not have acted “knowingly.”  The Seventh Circuit affirmed the ruling, relying on its application of the Safeco test, taken from an earlier Supreme Court decision by that name which had interpreted the term “willfully” under the Fair Credit Reporting Act.  Under that (now overturned) two-step inquiry as it was applied in FCA cases, when a relevant provision was ambiguous, a court first determined whether a party’s act was consistent with any objectively reasonable interpretation of the applicable provision before it could consider the party’s actual knowledge and beliefs.  Since the Seventh Circuit found that the pharmacy’s acts were consistent with an objectively reasonable interpretation, it did not proceed to step two.

The Supreme Court granted certiorari to decide whether a party can knowingly submit a false claim if that party actually thinks its claim is false but a hypothetical, reasonable party would not.  The Supreme Court held that the scienter element in the FCA incorporates the common law of fraud, and thus only refers to a party’s knowledge or subjective beliefs at the time a claim is presented, adding that any facial ambiguity alone would not be sufficient to preclude a finding that the defendant acted knowingly.  Under the FCA, a party “knowingly” submits a false claim when it actually knows that the information is false, or acts with deliberate ignorance or reckless disregard of the truth or falsity of that information. 

In support of applying the Safeco test, the pharmacies had argued the inherent ambiguity of “usual and customary.”  However, the Supreme Court rejected that argument, finding that if a party learned of the correct meaning, or even became aware of an interpretation that very likely was the correct meaning, scienter could be established.  The Court also rejected the pharmacies’ defense that misrepresentations of law are not actionable.  While it did not decide whether the FCA incorporated the rule that misrepresentations of law are not actionable, the Court found that statements involving legal analysis may be actionable if they carry with them by implication an assertion about facts that justify the party’s conduct.

The Supreme Court vacated the judgments below and remanded the actions to the Seventh Circuit for further proceedings consistent with its opinion.

The case is United States ex rel. Schutte v. SuperValu Inc., 598 U.S. ___, Nos. 21-1326, 22-111 (June 1, 2023).